Before you file

Absent an emergency, it may pay to do some bankruptcy planning

You must get credit counseling for you file bankruptcy from a non profit agency approved in the district in which you will file.

If your income has been varied in the past six months, analyze whether you are benefited by filing sooner or waiting. Eligibility to file Chapter 7 and the terms of a Chapter 13 plan are now driven by your income in the six months before you file. More on the means test.

What debt is dischargeable

If the bankruptcy is not going to be filed immediately, know what debt will survive the Chapter 7 filing in planning your financial life in the interim.  

It may be to your advantage to maximize your payments to debts that are not going to be discharged (like taxes, secured debt, and family support) and cease paying dischargeable debts.  

If all of your debt is dischargeable, you may be able to accumulate cash by not making payments on existing debt.  See Paying for Bankruptcy and Exemptions, below.

      What's dischargeable in Chapter 7

      Assessing the dischargeability of credit card debt

Cash advances on a credit card aggregating over $750 made within 70 days before the case is filed are presumed to be fraudulent and therefore non dischargeable.  Any charges to credit cards after you decide to file bankruptcy, or even meet with a bankruptcy lawyer, are arguably non dischargeable because you didn't have an intent to pay the bill when you made the charge.

If taxes are involved,  know exactly which taxes are priority:  that means knowing about extensions of time to file tax returns (for calculating the "three year rule");  when a tax was assessed (the "240 day rule"); and when tardy tax returns were actually filed (the "two year rule") as well as any events that toll the running of the statute like offers in compromise.

      Taxes in bankruptcy

Note that recent changes to the discharge provisions make loans used to pay non dischargeable federal taxes non dischargeable.  

Maximizing exemptions

Know what you are permitted to exempt from the claims of your creditors.  

      What can I keep?

If you have significant non exempt assets, get good bankruptcy counsel about converting non exempt value into exempt value.  

Courts are variable about what constitutes good bankruptcy planning versus what is a scheme to "hinder, delay or defraud creditors".  Maximizing exemptions is traditionally permissible; hindering your creditors is grounds for denial of discharge.  

I submit that these are but two ends of a continuum and drawing any lines along that continuum is art, not science.  

If your assets exceed the exemptions available in your state, bankruptcy counsel can evaluate the extent to which those assets can be consumed or converted to exempt assets within the tolerances of the local judges.  

    One judge's view on exemption planning

Having substantial non exempt assets may also suggest filing Chapter 13 rather than Chapter 7.  

  Why 13?

Anticipating avoidance actions

Debtors frequently want to protect creditors who are friends or family members from having to disgorge to the bankruptcy trustee payments made by the debtor or to pay off a credit card so they can keep it after the bankruptcy.  

Payments made, or liens perfected, within 90 days of the bankruptcy may be avoided by the trustee as preferences.  If the recipient of the transfer is an "insider", the look back period is 12 months.  "Insider" is defined in 11 U.S.C. 101 and includes family members, partners, and corporations in which the debtor is a decision maker.  

      Preferences from a creditor's point of view.

It is not wrong for the debtor to make payment to one creditor over another on genuine debts.  It is the creditor, not the debtor, who stands to lose if the trustee elects to avoid a payment as a preference.   

If you want to provide for some creditors over others, you need to know whether that creditor is an insider and when the transfer is deemed made for purposes of the Bankruptcy Code.

The cost of filing suit to recover preferences from  creditors usually limits trustee preference actions to transfers in the thousands of dollars.   

As an alternative to paying the creditor's claim before bankruptcy, the debtor can also reaffirm a debt after bankruptcy,  or just pay the debt voluntarily after bankruptcy, without a formal reaffirmation.

Money on deposit vulnerable

If you bank or have investments at an institution to which you owe money, on a loan or a credit card, that institution probably has the right under state law to take your money on deposit and apply it to your debt to them.  

Thus, if you file bankruptcy owing a bundle on your Big Bank credit card, Big Bank can take the contents of your checking account at Big Bank on the day you file to pay the credit card bill.

So, good planning says "don't have your assets in institutions to which you owe money. "

Although the right of set-off should not apply to funds deposited after the bankruptcy case is filed, the chances for bureaucratic snafus are ever present. Better safe than embroiled in telling a bank they violated the law.

We advise clients to open up new account before they file and move all of their cash, and automatic deposit instructions, to new banks. Automatic debit difficulties.

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